How Can an LLC-S Change to a Partnership?


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One of the questions we got at our last webinar had to do with business structures. The webinar dealt with tax and asset protection strategies for real estate investors, but we always open our webinars up at the end for questions. If you would like to hear the recording of this real estate webinar, please go to http://www.RealEstateLoopholes.com .

We had too many questions for the time, so we’re catching up on the questions through the blogs.

Today, the question had to do with someone who had set up an LLC (limited liability company) and elected the S Corporation status. Now they would rather have it taxed as a partnership. They want to know how to do that.

My first issue is whether it really is a good move to go from S Corp tax to partnership status. If the member is asking how to make the change, my guess is that they are strictly DIY (do it yourself). And that makes me nervous that they haven’t considered the consequences.

The change will mean that the assets will have to transfer out at fair market value. If they’ve gone up in value, that means there has been a taxable event. Yes, you will have to pay tax even though you haven’t sold a thing. Just moving assets out of an S Corp can mean taxes.

If the S Corp was the right structure to begin with because there is a business with active income, than switching to a partnership will trigger 15.3% self-employment tax.

The better answer might be to create a brand new structure for the partnership. That way there won’t be a tax if assets distribute and the S Corporation structure is still available for business income.

This is the type of question that I’m very reluctant to answer because I could absolutely tell you how to make the election change from an S Corp to a partnership but we would have to look at the 5 year rule, distribution tax issues and ongoing tax issues. It’s an easy answer, on the surface, but with a lot of danger underneath.

If you have a tax question like this, please talk to a tax pro before you move business structures around. We offer affordable consulting on this and other tax issues. Give us a call! You can reach Richard at 888-592-4769 to find out more information.



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